Everyone Needs an Emergency Fund
Everyone needs an emergency fund. Why? Because life happens: things in your home break, cars break down, people get sick or injured, things happen at work or in government, and pandemics and other states of emergency happen. When you don’t have funds on reserve that you can draw from, you lean on other people or institutions to borrow from. That creates debt and adds stress to already stressful situations. In the end, it costs you more than you borrowed, whether that’s by way of interest or by way of strained relationships, guilt, or shame. Borrowing doesn’t come free.
How Much Do You Need?
How much should you save depends on your situation. I still like Dave Ramsey’s $1000 starter emergency fund. It’s more than a lot of us ever had for more than a pay period or two, but it’s not too intimidating. It’s something that’s doable in a matter of months for most people. You can set interim goals like saving $100, then $250, then $500, and then $1000. I still remember how proud I was just to have $1000 in my account. That was a lot of money to me and it was a relief to know it was there- just in case something came up.
Your $1000 will take care of small emergencies like flat tires, busted hot water heaters, and trips to the emergency room. When you use any of it, make repaying it your new priority.
Then start looking at long term. Your emergency fund should eventually be able to support some of the emergencies mentioned earlier in this post. You’ll need more than a $1000 for example, to cover you for a job loss or an injury that puts you out of commission for an extended period (especially beyond available sick leave from work).
So, do this. Add up all your bills- especially your essential bills. How much will you need to cover your expenses if you had no income for an entire month? Multiply that times three if you are aiming for a 3-month emergency fund and multiple by six if you are aiming for a 6-month emergency fund. How much cushion could your family get by with, if all income stopped for a period of time? How much time will you need to get things going again, to get that lost income started back up, to find a new job, etc?
Consider factors like these:
Are you a single or dual income household?
Do you have stable jobs and steady income or irregular income?
Does anyone in the household have a major illness?
Are there are other financial considerations?
Are government shutdowns/ furloughs possible?
Do you need to fund other things concurrently (like purchasing a home, moving expenses, a wedding, or a replacement vehicle)?
How you answer all of these questions, will determine how much you should have as a long-term emergency savings goal. It may take a year or two (or more), but you’ll already be ahead of the game by having that $1000 starter fund.
Some financial experts say, pause saving while you work on getting out of debt. That’s a personal decision you’ll have to make. I did that, until the pandemic hit. Then, I decided to split my surplus income between bulking up my emergency fund and paying off my student loan (my last non-mortgage debt). It’s slowing down my debt freedom date, but at this point, I value that extra cushion of money- just in case something happens to my “good government job.” The way, I look at it is, I’m still hitting my next two priorities (debt elimination and 3-month emergency fund) and I still have a possibility of making my debt freedom date of 12/31/2023.
Talk it over with your family and do what’s right for you all.
Experts who say, focus on only the next goal, know that there is an increased chance you’ll lose momentum and give up if you spread yourself thin. You probably can’t do four things all at once (i.e. build a 3-month emergency fund, pay off all our debt, save for a new home, and finance going back to school for a new degree). But you may be able to do two things at once (i.e. put a couple hundred dollars towards your emergency fund and a couple hundred towards debt elimination, each month).
Conclusion
Bottom line, do what’s good for you. Everyone needs an emergency fund. Start with $1000, but don’t stop there. Set your long-term emergency fund goal, create a plan as to when you’ll start working on that, determine how aggressive you want to be, and follow through. Do what you say you’re going to do and trust God, no matter what.
